“2018 is likely to see an important transition in the U.S. economy,” said BlackRock. “We see economic slack mostly disappearing as the labor market strengthens and the expansion motors on. Inflation expectations were dented this year due to the surprise slowdown, tied to major one-off drops and moderation in some categories such as housing. Yet we see inflation expectations firming up as prices climb at a gradual pace.”
It is widely expected that the Federal Reserve will raise interest rates at its December meeting, its third such move this year. However, the pace of rate hikes is expected to slow in 2018 and market observers believe that any corresponding increase in the U.S. dollar is also likely to be gradual.
While inflation expectations may remain muted now, investors are already looking into TIPS as a hedge against rising prices ahead. TIPS returns are affected by interest-rate risk as well as changes in the principal value when the Consumer Price Index moves. TIPS will adjust their principal value upward in response to a higher CPI, but the reverse occurs during periods of deflation.
For more information on Treasury inflation protected securities, visit our TIPS category.